U.S. Supreme Court Upholds Mandatory Arbitration In Employment Cases

04/01/2001

On March 21, 2001, the United States Supreme Court gave the green light to predispute, mandatory arbitration agreements in the employment setting. Circuit City Stores, Inc. v. Saint Clair Adams, No. 99-1379, 2001 WL 273205 (March 21, 2001). This landmark ruling allows employers to require employees, as a condition of employment, to enter into an agreement that the parties will submit all employment disputes, including discrimination claims under state or federal law, to binding arbitration before an arbitrator, rather than a judge or jury in a court of law.

Reasoning that Congress enacted the Federal Arbitration Act ("FAA") to respond to the long held "hostility" of American courts to arbitration agreements, the Supreme Court rejected Adams' position that Congress never intended the FAA to reach employment contracts in general. In an effort to escape from the terms of the Circuit City predispute arbitration agreement he signed, Adams maintained that the FAA exempts "contracts of employment of seaman, railroad employees, or any other class of workers engaged in foreign or interstate commerce" and, therefore, all employment contracts involving "commerce" fall outside the FAA's scope. The high court rejected Adams' position, concluding that the FAA exemption was a limited one and applied only to transportation workers who move goods in foreign or interstate commerce.

Having concluded that the FAA covered Adams' agreement with Circuit City, the Supreme Court also addressed the assertion that arbitration agreements are inherently "unfair." In response to the fairness arguments raised by various pro-plaintiff groups, the Court explained that arbitration agreements help feuding parties avoid the costs of litigation, "a benefit that may be of particular importance in employment litigation, which often involves smaller sums of money than disputes concerning commercial contracts." Moreover, the Court reasoned that arbitration does not mean that Adams must give up his substantive rights under state and federal discrimination laws. Rather, he merely submits his claims to "an arbitral, rather than a judicial, forum."

The Circuit City decision demonstrates that employers may implement mandatory pre-dispute arbitration agreements that require the parties to submit statutory employment discrimination claims to an arbitral, rather than a judicial forum. The decision should also offer comfort to employers with nationwide or regional operations in several states - the FAA preempts a host of state laws containing anti-arbitration provisions.

In an unrelated case, the Supreme Court has agreed to hear EEOC v. Waffle House, Inc., No. 99-1823, 2001 WL 285799 (March 26, 2001). The high court will decide whether arbitration agreements between an employer and its employees are binding on the EEOC, and prevent the agency from recovering monetary damages against an employer outside of the arbitration agreement.

Currently, the federal courts of appeal are split on this issue: the Second and Fourth Circuits hold that an employment arbitration agreement allows the EEOC to bring suit on behalf of aggrieved workers, but precludes the agency from seeking monetary or "make whole" relief. By contrast, the Sixth Circuit holds that, because the EEOC is not technically a party to agreements between and employer and employee, the scope of the agency's lawsuit cannot be limited by private arbitration agreements. These courts also reason that the EEOC, as an arm of the federal government, not only seeks to vindicate the rights of aggrieved employees, but also endeavors to enforce the federal anti-discrimination laws in the public interest. The Court will hear this case during its 2001-02 term that begins in October 2001.

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